Executive Summary

The Grand Jury became aware last summer of a looming financial crisis facing Alameda County’s safety-net hospital system. Due to concerns about its governance and management, the Grand Jury undertook an investigation into the Alameda Health System (AHS), which is tasked with providing indigent health care. AHS has a nearly $200 million debt owed to the County of Alameda Consolidated Treasury and is suffering from significant issues regarding its financial structure. The recent acquisitions of Alameda Hospital and San Leandro Hospital have exacerbated these financial challenges.

The Alameda County Board of Supervisors depth of commitment to AHS and its mission is unquestioned. This is clearly illustrated by its financial support ($700 million for the Highland Hospital Acute Tower replacement). However, the Grand Jury is concerned that the lack of leadership and scrutiny on the part of the AHS board of trustees and lack of oversight by the county board of supervisors contributed to the financial problems at AHS. In the course of its investigation, the Grand Jury learned of breakdowns in communication among AHS management, the AHS trustees, and the Alameda County Board of Supervisors (BOS). These breakdowns created a roadblock to crafting a comprehensive solution to the $59.1 million gap between AHS’ obligations to the county and its actual performance as of June 30, 2014.

The Grand Jury further notes that before AHS’ precarious financial situation became widely known to the public, voters extended Measure A, a half-cent sales tax, for 20 years to continue giving AHS approximately $100 million a year to supplement its operational costs. The measure mandates that a public oversight committee review the expenditure of these funds. The Grand Jury is concerned that the citizen’s oversight committee has not been provided with sufficient information to ensure these funds have been spent in conformity with the measure’s intent.

Conclusion

Beginning in July 2013, the Alameda Health System faced very serious cash flow issues due to a difficult transition to new health records and financial billings systems and the acquisition of two struggling hospitals. It also faced ongoing structural financial issues, but some of the financial damage was self-inflicted as the AHS board failed to perform sufficient due diligence of the San Leandro Hospital acquisition.

The Grand Jury is concerned that the AHS board relied on executive staff recommendations and was swayed by political leaders regarding the acquisition of San Leandro Hospital, without demanding the due diligence it had earlier requested. This resulted in AHS’ board of trustees finalizing the acquisition without fully understanding the negative financial consequences.

Failures in the channels of communication between AHS executive staff and its board, and also between AHS and the Alameda County Board of Supervisors, exacerbated the financial problems. These breakdowns in communication also became barriers that delayed both agencies from crafting comprehensive solutions, in effect preventing both boards from carrying out their mandated responsibility to oversee the finances of the massive and complicated organization.

The Alameda Health System Board of Trustees must now make very difficult decisions to remedy structural financial problems. To ensure that AHS stays on track, the Alameda County Board of Supervisors must demand detailed and regular financial reporting from AHS. This will help the board of supervisors reestablish its oversight of the health system. The board of supervisors must also mandate that the Alameda Health System implement a sustainable financial model with clearly defined performance-related metrics to ensure that public funds are spent in a prudent and responsible manner. Finally, both organizations must ensure that the public has access to such information in order to help rebuild confidence in the viability of this essential county service.

FINDINGS

Finding 15-9: The Alameda Health System Board of Trustees failed to ensure that a prudent and professional due diligence process was conducted from the period of May to October 31, 2013, allowing the financially damaging acquisition of San Leandro Hospital to be completed.

Finding 15-10: By the end of November 2013, the Alameda Health System Board of Trustees was fully aware of the major financial issues Alameda Health System faced and the fact that Alameda Health System would not meet its year-end financial obligation to the county, but failed to provide the contractually obligated written notice to the county.

Finding 15-11: Effective oversight by the Alameda County Board of Supervisors health committee and joint board meetings between the Board of Supervisors and the Alameda Health System Board of Trustees, failed to bring to light the major financial issues that Alameda Health System was dealing with between July 1, 2013 and June 30, 2014. Coincidentally, in June 2014, the voters approved an extension of the Measure A sales tax benefiting Alameda Health System.

Finding 15-12: There was a need for at least $50 million in cost reductions to provide the Alameda Health System with a sufficient operating margin to repay the county loan and pension obligations, while attempting to achieve its strategic vision. This was first identified in November 2013, but little action was taken for at least one year in response to this need.

Finding 15-13: The resulting delay in implementing the cost savings program of at least $50 million means that Alameda Health System will need to add additional savings projects of similar magnitude in subsequent years to remain financially viable.

Finding 15-14: Had open, transparent communications and proper oversight by both the Alameda Health System Board of Trustees and the Alameda County Board of Supervisors been in place from July 2013, the cash flow issues would have been controlled earlier and cost restructuring targets achieved sooner, mitigating the impact of the current delay.

RECOMMENDATIONS

Recommendation 15-10:

The Alameda Health System Board of Trustees must make available online, board audio or video recordings for all of its public meetings and ensure that agendas, minutes and board packets are posted in a timely manner.

Recommendation 15-11:

The Alameda Health System must provide detailed, accurate, ongoing financial reports to the Alameda County Board of Supervisors health committee to ensure data is available to support effective oversight.

Recommendation 15-12:

The Alameda County Board of Supervisors must develop a closer working relationship with the Alameda Health System Board of Trustees and management by implementing the Board of Supervisors’ recently proposed joint planning committee, comprised of two supervisors and two trustees, or a similar model.

Recommendation 15-13:

Alameda Health System must develop a set of metrics satisfactory to the Alameda County Health Care Services Agency, linking its financial performance and delivery of medical services to provide an additional layer of oversight and support.

Recommendation 15-14:

Alameda Health System must provide the Measure A Oversight Committee with performance indicators consistent with the requirements of the measure.